Personal Financial Statements Text - CPE Store

Personal Financial StatementsExhibit 1.2 Illustrative Financial StatementsJAMES AND JANE PERSONStatements of Financial ConditionDecember 31, 20X3 and 20X2December 3120X320X2AssetsCashBonus receivableInvestmentsMarketable securities (Note 2)Stock options (Note 3)Kenbruce Associates (Note 4)Davekar Company, Inc. (Note 5)Vested interest in deferred profit-sharing planRemainder interest in testamentary trust (Note 6)Cash value of life insurance ( 43,600 and 42,900),less loans payable to insurance companies( 38,100 and 37,700) (Note 7)Residence (Note 8)Personal effects (excluding jewelry) (Note 9)Jewelry (Note 9)LiabilitiesIncome taxes—current year balanceDemand 10.5% note payable to bankMortgage payable (Note 10)Contingent liabilities (Note 11)Estimated income taxes on the differences betweenthe estimated current values of the assets and theestimated current amounts of liabilities and theirtax bases (Note 12)Net worthThe notes are an integral part of these statements.Source: SOP No. 82-1 (FASB ASC 274-10)4 3,70020,000 00055,00040,000 1,384,0005,200180,00050,00036,500 1,206,700 0001,013,000 1,384,000160,000921,300 1,206,700

Personal Financial StatementsExhibit 1.2 continuedYear ended December 3120X320X2Realized increases in net worthSalary and bonusDividends and interest incomeDistribution from limited partnershipGains on sales of marketable securities Realized decreases in net worthIncome taxesInterest expenseReal estate taxesPersonal expendituresNet realized increase in net worthUnrealized increases in net worthMarketable securities (net of realized gains onsecurities sold)Stock optionsDavekar Company, Inc.Kenbruce AssociatesDeferred profit-sharing planRemainder interest in testamentary trustJewelryUnrealized decrease in net worthEstimated income taxes on the differencesbetween the estimated current values of assetsand the estimated current amounts of liabilitiesand their tax basesNet unrealized increase in net worthNet increase in net worthNet worth at the beginning of yearNet worth at the end of yearThe notes are an integral part of these statements.595,0002,3005,0001,000103,300 0079,00068,10091,700921,300 0060,500

Personal Financial StatementsExhibit 1.2 continuedJAMES AND JANE PERSONNotes to Financial StatementsNote 1 The accompanying financial statements include the assets and liabilities of James and JanePerson. Assets are stated at their estimated current values and liabilities at their estimated currentamounts.Note 2 The estimated current values of marketable securities are either (a) their quoted closing pricesor (b) for securities not traded on the financial statement date, amounts that fall within the range ofquoted bid and asked prices.Marketable securities consist of the following:December 31, 20X3Number Estimatedof Shares Currentor BondsValuesStocksJaiven Jewels, Inc.McRae Motors, Ltd.Parker Sisters, Inc.Rosenfield Rug Co.Rubin Paint CompanyWeiss Potato Chips, Inc.1,500800400BondsJackson Van Lines, Ltd. (12% due 7/1/X9)United Garvey, Inc. (7% due 11/15/X6) ,5006,725160,500December 31, 20X2Number Estimatedof Shares Currentor Bonds Values600 5,1001,7006,800140,700Note 3 Jane Person owns options to acquire 4,000 shares of stock of Winner Corp. at an option priceof 5 per share. The option expires on June 30, 20X5. The estimated current value is its published sellingprice.Note 4 The investment in Kenbruce Associates is an 8% interest in a real estate limited partnership.The estimated current value is determined by the projected annual cash receipts and payments capitalized at a 12% rate.Note 5 James Person owns 50% of the common stock of Davekar Company, Inc., a retail mail orderbusiness. The estimated current value of the investment is determined by the provisions of a shareholders’ agreement, which restricts the sale of the stock and, under certain conditions, requires the companyto repurchase the stock based on a price equal to the book value of the net assets plus an agreed amountfor goodwill. At December 31, 20X3, the agreed amount for goodwill was 112,500, and at December 31,20X2, it was 100,000.A condensed balance sheet of Davekar Company, Inc., prepared in conformity with generally acceptedaccounting principles, is summarized below:6

Personal Financial StatementsExhibit 1.2 continuedDecember 3120X320X2Current assetsPlant, property, and equipment—netOther assetsTotal assets Current liabilitiesLong-term liabilitiesTotal liabilitiesEquity 557,000875,000 480,000750,000The sales and net income for 20X3 were 10,500,000 and 125,000 and for 20X2 were 9,700,000 and 80,000.Note 6 Jane Person is the beneficiary of a remainder interest in a testamentary trust under the will ofthe late Joseph Jones. The amount included in the accompanying statements is her remainder interest inthe estimated current value of the trust assets, discounted at 10%.Note 7 At December 31, 20X3 and 20X2, James Person owned a 300,000 whole life insurance policy.Note 8 The estimated current value of the residence is its purchase price plus the cost of improvements. The residence was purchased in December 20X1, and improvements were made in 20X2 and20X3.Note 9 The estimated current values of personal effects and jewelry are the appraised values of thoseassets, determined by an independent appraiser for insurance purposes.Note 10 The mortgage (collateralized by the residence) is payable in monthly installments of 815 amonth, including interest at 10% a year through 20Y8.Note 11 James Person has guaranteed the payment of loans of Davekar Company, Inc., under a 500,000 line of credit. The loan balance was 300,000 at December 31, 20X3, and 400,000 at December 31, 20X2.Note 12 The estimated current amounts of liabilities at December 31, 20X3, and December 31, 20X2,equaled their tax bases. Estimated income taxes have been provided on the excess of the estimatedcurrent values of assets over their tax bases as if the estimated current values of the assets had beenrealized on the statement date, using applicable tax laws and regulations. The provision will probablydiffer from the amounts of income taxes that eventually might be paid because those amounts aredetermined by the timing and the method of disposal or realization and the tax laws and regulations ineffect at the time of disposal or realization.The estimated current values of assets exceeded their tax bases by 850,000 at December 31, 20X3,and by 770,300 at December 31, 20X2. The excess of estimated current values of major assets overtheir tax bases are—Investment in Davekar Company, Inc.Vested interest in deferred profit-sharing planInvestment in marketable securitiesRemainder interest in testamentary trust7 December 3120X320X2430,500 355,500111,40098,900104,100100,00097,00053,900

Personal Financial StatementsPractical TipsDue Diligence in the Accountant–Client RelationshipAs is the case with any potential business relationship, before accepting an engagement involving personal financial statements, the accountant ordinarilywould evaluate certain aspects of the potential client relationship.The accountant may wish to consider facts that might bear on the integrityof the prospective client. Consideration of the character and reputation of theindividual helps to minimize the possibility of association with a client wholacks integrity. The extent of the accountant’s inquiries before acceptance mightdepend on his or her previous knowledge of the client and the nature of the client’s financial activities. The accountant may want to consult predecessor accountants or auditors, attorneys, bankers, and others having business relationships with the individual regarding facts that might bear on the integrity of theprospective client. This does not suggest that, in accepting an engagement, theaccountant vouches for the integrity or reliability of a client. However, prudencesuggests that an accountant be selective in determining his or her professionalrelationships. It is not unknown for a seemingly high-profile potential client,complete with private jet and an entourage of assistants, to be a fraudster, destined for more humble quarters in a prison.The accountant may also wish to consider circumstances that present unusual business risk, such as considering whether an individual is in serious financial difficulty and if that fact could have a bearing on the integrity of the information presented to the accountant for the preparation of the financial statements.In addition, the accountant may want to consider up front the effect of anylack of independence on the type of report he may issue in compliance with professional standards. Statements on Standards for Accounting and Review Services (SSARS) No. 19 permits the accountant to issue a compilation report onpersonal financial statements of an individual with respect to whom the accountant is not independent. However, the accountant must be independent to issue areview report or an audit opinion. For example, if a prospective client requestinga personal financial statement is the co-owner of a business with the spouse ofthe accountant, the accountant is not independent and can issue a compilationonly.Before accepting an engagement involving personal financial statements,the accountant may want to ask the potential client about the availability of records and consider whether available records provide a basis sufficient forproviding the services requested. Incomplete or inadequate accounting recordsare likely to give rise to problems in compiling, reviewing, or auditing personalfinancial statements. Because of the informal nature of most personal financialrecords, the accountant should evaluate the need to perform other accountingservices in conjunction with personal financial records. AICPA Interpretation8

Personal Financial StatementsNo. 101–3, Performance of Nonattest Services, should be consulted for guidance.Professional standards require the accountant to attain a certain level ofknowledge of the client’s financial activities. Before accepting an engagement,the accountant should consider whether he or she can obtain an appropriate understanding of the nature of the prospective client’s financial activities and thespecialized accounting principles and practices related to any of the client’s financial activities.Understanding of the Engagement to All PartiesOnce the accountant has decided to accept an engagement involving personalfinancial statements, SSARS No. 19, Compilation and Review Engagements,states: “[T]he accountant should establish an understanding with managementregarding the services to be performed for compilation engagements and shoulddocument the understanding through a written communication with management.”The individuals requesting personal financial statements may not be familiar with the accountant’s service or its limitations and may confuse such engagements with audits. It is important that both parties have an understanding ofthe engagement, and a written understanding is the best one to prevent misunderstandings. An engagement letter would normally include: Type of service being provided (compilation, review, or audit) Statements to be produced Applicable standards Client and accountant/auditor responsibilities Differences among compilations, reviews, and audits Indication that the engagement cannot be relied on to disclose errors,fraud, or illegal acts FeesValue of Written RepresentationsTalk is cheap and can be easily misconstrued or, in retrospect, be unclear as tofacts and circumstances. During an engagement, the client will ordinarily makemany representations to the accountant. Documentation of these representationsin written form will indicate their continuing appropriateness and reduce thepossibility of misunderstanding. The actual content of the letter will depend onthe circumstances of the particular engagement.Generally accepted auditing standards (GAAS) require that an independentauditor performing an audit in accordance with GAAS obtain written representations from management for all financial statements and periods covered by theauditor’s reports. The representation should be addressed to the auditor andshould be made as of a date no earlier than the date of the auditor’s report.9

Personal Financial StatementsSAARS No. 19 requires that the accountant obtain a representation letterfrom the client as part of every review engagement as well. Compilation engagements do not contemplate tests of accounting records and of responses toinquiries by obtaining corroborating evidential matter. However, because of theinformal nature of most personal financial records, it is advisable to obtain written representation from the client to confirm the oral representations made in allpersonal financial statement engagements.Operating Rules Are Otherwise Known as Applicable ProfessionalStandardsThe primary authoritative guidance for accountants on the preparation of personal financial statements is SOP No. 82–1, Accounting and Financial Reporting for Personal Financial Statements, issued by the AICPA (FASB ASC 274–10).Accountants are often engaged to compile, review, or audit personal financial statements. These different types of engagements are governed by differentstandards. Standards for compilation of financial statements prescribed bySSARS No. 19 are applicable to the compilation of personal financial statementsin the same manner as they apply to the compilation of other financial statements.However, AICPA release

A personal financial statement presents the personal assets and liabilities of an individual, a couple or a family. It is not a financial statement on a business owned by the person; however, it does contain important information about such business interests. The essential purpose of a personal financial statement is to measure wealth